Cha-Ching! Neural Processes Underlie Economic Decisions

by Elizabeth Norton Lasley

July, 2005

Since imaging technologies made their debut in the early 1990s, they have gone from providing colored pictures of specific brain areas to yielding valuable information about complex behavior. Such understanding is of importance not only to clinicians and psychotherapists but, perhaps surprisingly, to economists.

The laws of economics have traditionally discounted the brain, assigning values to observed behavior and assuming that everyone will act in his or her own best interest. "Economists have been happily ignorant of the brain and psychology, and until recently that's been fine because the brain processes underlying behavior weren't understood," says Colin Camerer, an economist at the California Institute of Technology. But humans are perplexing creatures who behave in irrational ways, and brain imaging is beginning to offer some explanations.

The Circuitry of Satisfaction

A central question in economics is why people want the things they want, or, in neuroscience terms, how the brain processes reward. Imaging studies show that in response to perceived reward, a brain region called the striatum is activated in remarkably specific ways.

The striatum comprises two tubular structures in a V shape located behind the eyes; its chief neurotransmitter is the well-known reward chemical, dopamine. In a study published May 11, 2005, in the Journal of Neuroscience, Brian Knutson and colleagues at Stanford University found that when a person considers the value of monetary gain, functional magnetic resonance imaging (fMRI) scans showed activation in the striatum. But when subjects weighed the likelihood of getting the reward, activity was strongest in the cortex, the outermost layer of the brain where "executive" processes like analysis and impulse control take place-specifically in a structure called the medial prefrontal cortex (mPFC).

"Someone whose mPFC is not well-developed might focus on the size of the reward rather than its probability and make bad decisions, like gambling or playing the lottery," says Knutson.

The striatum is involved in a less obvious type of reward known as altruistic punishment, which Knutson likens to inching forward in traffic just to prevent the red sports car that's been zipping along the shoulder from getting back in. In a study reported in the August 27, 2004, issue of Science, Ernst Fehr and colleagues at the University of Zurich asked subjects to play several rounds of a game in which one player entrusted another with money. The second player had the option of giving back half or keeping it all; if Player B kept the money, Player A could assign a monetary punishment, though sometimes at an additional cost, depending on the rules of that round.

Positron emission tomography (PET) scans showed activity in the striatum when players accepted cost penalties for the sake of giving stingy partners their comeuppance. Moreover, players with strongest activation in the striatum were willing to incur the greatest cost to see justice done.

"Altruistic punishment is probably a key element in explaining the unprecedented level of cooperation in human societies," the authors wrote, concluding that the anticipated satisfaction of meting out punishment activates reward-related brain pathways.

Model-building and the Caudate Nucleus

A part of the striatum known as the caudate nucleus seems to be involved in predicting others' behavior-an ability central to both cooperation and competition. In another game involving money exchange, a team headed by P. Read Montague of the Baylor College of Medicine, Houston, noted increasing activity in the caudate as players began to trust each other. (See "News from the Frontier," May-June 2005 BrainWork.)

One player, the investor, gave money to the other, the trustee; the trustee could return some, all, or none. As reported in the April 1, 2005, Science, fMRI scans showed that activity in the investor's caudate grew stronger when the trustee responded generously and the investor increased the subsequent payment. The signal from the striatum also began to appear sooner as the investor gained confidence in the trustee-in the final rounds, even before the investor's decision was made-indicating that the caudate was building a model of the other player's actions.

In this game the results of each round were known right away-the trustee's response appeared on the investor's computer screen. But Camerer, one of the study's authors, says the caudate may be able to build an internal sense of what others will do even without immediate feedback. Camerer and California Institute of Technology economist Meghana Bhatt devised a game in which one player had to predict another's choices from a row of pictures on a computer screen. Activity in the caudate grew stronger as the player guessed correctly, even though the player did not know the results until the end of the game.

The study, published online May 17, 2005, in Games and Economic Behavior, turned up another interesting finding: players with strong activation in a region known as the insula were less able to anticipate what others would do. Camerer says the insula is likely to be "all about me," and high activity in this area may make it difficult to think strategically by putting oneself in another's place.

Neuroscience for the Common Good

Some skeptics dismiss imaging for purposes like these as a high-tech form of phrenology, the 19th century parlor science that involved interpreting the bumps on a person's scalp. Montague counters: "Even if fMRI did nothing more than provide a detailed atlas of brain activity, it would be a huge contribution. But you can use it to understand how people think, and, in many cases, to predict what they'll do."

This idea may suggest some evil conglomerate peering into consumers' brains and exploiting their neural circuitry for profit. But the possibilities of imaging can be viewed the other way around. Aside from what Knutson cites as the obvious difficulty of getting the consumer into the scanner, Camerer believes that with a better understanding of brain and behavior, economists can help people make better choices-both about immediate purchases and long-term financial planning. Such choices might lower the estimated $5,000-perhousehold credit card debt, or lower the number of personal bankruptcies from the 1.5 million filed in 2004.

Finding ways to better integrate cortical and striatal areas might help people defer gratification and grasp the realities of compound interest. One day, insolvency might even be a treatable disorder.